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Listed property companies may face $100m/year CGT

A capital gains tax could see listed investment property companies paying an additional $100 million in tax a year, according to a University of Auckland study.

The findings, from accounting professors Jilnaught Wong and Norman Wong, come as the government’s Tax Working Group prepares to release its interim report to ministers this week.

A capital gains tax is expected to be one of the options for the government to consider. 

As well as examining the impact of a capital gains tax on listed property companies, the professors’ research pulls together other studies on the impact of the tax on property owners. For example, an Inland Revenue/NZ Treasury study in 2009 estimated that taxing gains on property, other than owner-occupied houses, could raise $4.2 billion a year.

At present, investment property companies make much of their money from rents. They also generate income buying and selling assets but mostly don’t pay tax on the gains. This means their effective tax rate is far lower than other companies.

For example, the research found that Goodman Property Trust paid an effective tax rate of just 3 percent between 2015 and 2017, whereas Fisher & Paykel Healthcare paid 29 percent. Kiwi Property Group, formerly Kiwi Income Property Trust, paid effective tax at 16.7 percent over the three years, just about half of that paid by companies like Mainfreight, Restaurant Brands or Sky Network Television.

Jilnaught Wong says he and Norman had to make a number of assumptions to come up with their number for the shortfall in tax from listed property companies. These are:

- that CGT will be taxed at the present 28 percent corporate tax rate;

- that the government won’t exempt existing assets - the so-called ‘grandfathering provision’ used in Australia but not elsewhere;

- that 100 percent of a gain is subject to tax;

- that the gains aren’t taxed retrospectively;

- and that past fair value gains can be used to proxy for future realised capital gains.

Given these assumptions “our results indicated that taxing the listed investment property companies’ fair value gains would increase the tax currently paid on taxable income by 144 percent and would add an additional $100 million per annum to their tax burden, thereby increasing the government’s tax revenues by that amount”, the study says.

Contrast the potential to pay no tax on a $100,000 gain on the value of property, with the $23,920 of tax that could be imposed on a $100,000 salary.

It presents evidence for the “fairness”, “efficiency”, “integrity” and “simplicity” of a capital gains tax.

“New Zealand’s present system does not meet the horizontal equity standard” where those in similar circumstances pay the same tax, the paper says.

It contrasts the potential to pay no tax on a $100,000 gain on the value of property, with the $23,920 of tax that could be imposed on a $100,000 salary.

The pair say that not only would a capital gains tax raise significant revenue for the government and increase fairness in the system, it also brings other advantages.

“It redirects investments to those that yield the highest rates of return by reducing disproportionate investments that are driven by favourable tax effects. [And] by closing loopholes that exist for the opportunistic conversion of income to capital, the CGT will protect the integrity of the tax laws, thereby protecting the integrity of the income tax base.”

The research shows listed retirement village/aged care companies are even better off when it comes to tax treatment than their property company counterparts. Ryman Healthcare’s effective tax rate was 1.7 percent between 2015 and 2017, according to the study. Summerset Holdings paid 0.1 percent.

However a capital gains tax won’t affect them, Jilnaught Wong says, because in their business model they only sell the ‘right to occupy’ a home, not the home itself. That means their capital gains are locked in permanently.

“Disposing of the investment properties and realising the capital gains would be tantamount to killing the goose that laid the golden egg,” the study says.

The Tax Working Group, chaired by former Finance Minister Michael Cullen, received 6,700 public submissions on future tax reform between March 1 and April 30 this year. A spokesman said the interim report “is on track to be released before the end of the month, but needs to be considered and noted by ministers first”.

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